Want to buy a home? Get your budget ready first.

My mom was a real estate agent who worked from home, so I grew up going to open houses and listening to her stories about offers, counteroffers, inspections, and escrows.  But even with that background, I came into my first (and only) homebuying experience unprepared. If it weren’t for our parents, siblings, and trusted friends, my husband and I would likely have miscalculated how much house we could afford to buy.

Because, let’s face it, the numbers can seem so incomprehensibly large that we get unanchored from reality.  I’m here to remind you not to overbuy — to look before you leap with eyes wide open to *all* the upfront *and* ongoing financial costs and opportunity costs of buying a home.

Understand that this is a long-term commitment that you’ll need to weather through various life seasons.  If you’re thinking about taking out a 15 or 30 year loan, imagine concretely what your life might be like in 5, 10, 15, 20, 25, and 30 years.  Who might be in your life? What other financial goals might you have (e.g. save for retirement, pay for college, cover long-term medical costs).  How would you adjust for that? It’s helpful to plan ahead for these possibilities. And especially if you’re thinking about stretching to make a bigger mortgage payment now, think about how you’ll adapt later.  Because while conventional wisdom used to say that your income would increase over the years, it’s quite possible that your real wages may or may not increase over time. Plus, know that you’re making a commitment to mow that proverbial lawn and take responsibility for home maintenance through many seasons and stages of your life.

For my husband Bruce and me, when we were considering buying, we had two full-time incomes and no kids.  If we had just thought about how much mortgage we could afford in that life stage, we might have gotten stuck financially later.  The length of our mortgage was likely to cross over into having kids, which could come with reduced incomes in order to stay home and/or increased childcare costs (spoiler alert, both happened!).  Further out, we’d probably encounter some major health emergencies (also happened!) and might need to care for aging parents (they’re all still thriving independently in their golden years). When we thought about budgeting to buy a home, our friends and family helped us to remember to consider these kinds of things.

Think through your backup plans.  It’s exciting to think about buying a home, and we can enjoy dreaming with our rose-colored glasses on.  But it’s also good to take those off for a second and consider, what’s your backup plan if things go south financially?  You might rent out one or more rooms, invite family to live with you and consolidate housing expenses, sell the house and rent instead, or move to a less expensive area.  Or, what’s your backup plan if you end up moving for some reason? Sometimes people say, “I’ll just sell,” but what if there’s a downturn in the market? It’s important to note that buying a home can mean less flexibility — it’s not quite as easy (or quick) to sell a house as is it to get out of a lease, so it can be harder to move to another home, neighborhood, or city.  And paying a mortgage on one place and rent on another is tough financially, so you might need another backup plan.

For us, it’s pretty common in our area for families to share homes, so if things went south financially, we planned to rent out part of the house.  Depending on how much buffer we needed, we could rent out a smaller or larger part of the house and downsize more significantly ourselves. And if things really got bad and we needed to move out, we knew we had many friends and family who have opened their homes to us in the past and would do so again.

Set a specific savings target for a down payment.  And other home buying costs. As with any goal, it’s good to get specific.  If you want to save to buy a house, think about how much you already have saved, plus how much you can save each month.  Then do your research and find out how much of a down payment you’d need to buy the kinds of houses you’re considering. There will also be upfront expenses for the home buying process itself, so include those too in your goal.  How long will it take you to reach that goal? And if it will take a while, know that the housing market (think: prices, interest rates) or your own life might change in the meantime. Consider what you’re willing to adjust — that might be your monthly budget, your income, your timeline, or even your goal.  You might adjust your expectations of what kind of house you might buy, or where, or when. Be flexible and reassess your priorities. Once you’ve decided on your goal down payment, set it up as a Goal Envelope in Goodbudget and start saving!

Here’s where my husband and I didn’t really follow the playbook.  We hadn’t planned to buy a house so soon, so we hadn’t been intentionally saving for a down payment.  We had just moved in as newlywed renters when, 3 months into our lease, our landlords put the house up for sale.  Since we anticipated being evicted and thought we’d have to move anyway, we figured we’d look into both renting and buying to see what options we might have.  In terms of a possible down payment, we worked with money we already had available and rearranged our priorities to move home buying up on the list ahead of other things.  That did limit the kinds of homes we could consider compared to our “ideal home,” but it ended up being a helpful constraint in the end.

Draft your sample homeowner’s budget.  And practice living with it.

You know what your budget looks like right now.  (Right? If not, start with GB 101.) But what would your budget look like if you owned a home?  Think about what areas you’d need to add. Don’t be fooled by the monthly mortgage payment and think that’s your monthly cost, because you’ll need to budget for all the other ongoing expenses of homeownership.  Now that you’ve got a sense of what you’ll need to add, think about what parts of your budget you’d be willing to reduce.  And, this is key — is that a life that you’re prepared to live?  Practice living with that budget for a while, perhaps a year. And in the meantime, use the space in your budget to save.

For us, we’d been handed a spreadsheet from my brothers that laid out various homeownership expenses, so we used that to sketch out what our budget might look like after purchasing a home.  We’d also been given the great advice to try to live off one income from the start of our marriage, so we planned our future budget based on that assumption. Since we bought our house on a quick timeline (two months from wondering about buying to keys in our hands), we didn’t practice living on that budget for very long, which I wouldn’t recommend.  In our case, though, we’d just transitioned from living separately and paying rent on two places to living together, so our budget had some flexibility in it already.

Consider the opportunity cost of buying a home

So once you’ve saved a down payment, set aside money for other home buying costs, and practiced living with your homeowners budget, that’s it, right?  Well, there’s also the opportunity cost of buying a home. That is, by choosing to buy a home, what are you giving up? You might be giving up the opportunity to save more aggressively for retirement, or to save more for college for the kids.  You might be giving up the flexibility to work less or to work a job that pays less. You may also be giving up the flexibility to pick up and move to a different state or country at the drop of a hat.

In our case, we saved less aggressively for retirement, and eventually, college for the kids.  And we also knew that after we bought a home, it wasn’t likely for us to move to another city or country without several major life changes.

With all that said, buying a home should have many steps. And one of the first is getting yourself ready financially by thinking about how you’ll make changes to your budget now and in the future. I hope you’re ready to do some thinking, some reflecting, and some budgeting!

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